Simon Thomson, the chief executive of Cairn Energy, expects 2019 to be an eventful one for the London-listed exploration and production company
Thomson has “high hopes” of discoveries that will please shareholders and potential development partners alike, given Cairn has seven drilling campaigns currently underway—four in in the mature North Sea and three in the prolific but underexplored Mexico Basin. Meanwhile, the company and its partner, Australia’s Woodside Petroleum, are confident of making a final investment decision (FID) in Senegal, five years after making a world class oil and gas discovery, underpinning the creation of a new African hydrocarbon province.
Another milestone this year for the FTSE-250 company could be the long-awaited return of $1.4bn being withheld by the India income tax department, the subject of a delayed arbitration run under the auspices of United Nations conference on trade and development in Geneva.
Earlier this year, Cairn shocked its shareholders when it revealed that, despite a final hearing on the tax case having been held at the end of 2018, the panel adjudicating was unable to say when it might deliver a decision, citing “workload and the number of matters before it” for further delay. It forced the company to book a $1.1bn net loss for the year ended 31 December and prompted analysts at financial services firm RBC Capital Markets to downgrade Cairn shares, noting that the “fast money” had moved into the long grass.
The tax case relates to transactions undertaken in 2006 ahead of the initial flotation of Cairn’s India-based business. But the first Cairn heard of it officially was in 2014 when India’s tax man clobbered it with the retrospective claim based on legislation that had changed in 2012.
The strength of the company’s claim is not in doubt, but the potential flimsiness of the UK-India bilateral investment treaty (BIT), which is the basis of the arbitration, is cause for concern. India established its first tranche of BITs in 1994 and, by 2016, faced an avalanche of claims, having become one of the most frequently-named respondent states in BIT proceedings. By 2017, India cancelled most of its BITs, including that with the UK.
Pressing ahead regardless
Thomson insists that the money will come. He is equally insistent that the lack of cash does nothing to impinge on the company’s plans. Cairn has long pledged that the bulk of the cash will be returned to shareholders. The pay-out represents a “differentiator” to Cairn shareholders, according to Thomson, and would be in line with the spirit of the $3.5bn windfall paid out on the initial sale of the bulk of its stake in its India operations to Vedanta in 2010.
“It does not change anything in terms of the outcome—it is just a frustrating timing issue,” Thomson says of the panel’s delay. "We expected, and therefore shareholders expected, there might be something soon. It is still the same upside, it is a little further away—it has been five years, this is a few more months.
“The important thing, and this is what we wanted to remind people at results: India is India, it will come. The underlying company is in great shape. Management has been clear they want to enact a significant return when it comes back. The important thing is we do not rely on it, the balance sheet is strong.”
“If you look at our charts over the last 10 years, you calculate our returns. $1bn is a significant out-performance on an annualised basis. It is distinctive for us. We are fortunate to have a strong group of shareholders who understand the company and the story. They expect us to do that,” says Thomson.
“Difference of opinion”
The company’s bottom line also revealed a net operating loss of $182mn due to a non-cash impairment in its 29.5pc stake in the Kraken field in the UK North Sea, which, along with the Catcher field, underpinned the $396mn of revenues it made in 2018.
Cairn shaved off 6.8mn bl off Kraken’s reserves due to lower-than-expected production levels of around 30,000bl/d due to production outages on the FPSO.
The operator, UK independent EnQuest, disagreed and issued a statement saying its reserves remained “materially unchanged”. Thomson says it was a “difference of opinion” rather than a row and confirmed that efforts on improving production could reverse the impairment.
“I do not think there is a field we have been in where we have had the same numbers as our partners. It is not that big a deal. It is just a different view, a different assumption on decline rate.”
“We have seen much, much better production rates,” Thomson adds. “The last few weeks it has been doing over 50,000bl/d. We did what we believed was prudent. There may be the potential to write some of that back as we book things in the future.”
With Nova, the Norwegian field operated by Germany’s Wintershall Dea, coming on stream in 2021 and the massive Senegal project, where first oil is due a year later, Thomson expects Cairn’s production to nearly triple at current levels of equity. The firm’s business formula remains consistent with its historic approach: fund exploration and development, about 50/50 each way, with production.
Thomson is excited about the company’s potential for new discoveries in the four-well drilling programme this year and next in Mexico, where Cairn gained acreage in 2017. “The reason why the last few years you have seen just about every man and his dog go to Mexico, bid in the bid round and acquire acreage, is because it is one of those known prolific hydrocarbon-bearing basins, but which is completely underexplored. It is one of those rare opportunities where you have got a pretty good chance of finding hydrocarbons, and we will start drilling in the second half of the year,” he says.
Finding the right balance of production that funds development and exploration is part of the reason why Thomson may yet sell down a further part of the company’s 40pc stake in Senegal. “Some time around FID we may sell some of it down, but we will definitely want to stay in,” he says.
Charms of Senegal
It is not hard to see parallels between Cairn’s Senegal play and its previous move into Rajasthan in India, which firmly established the company’s reputation for successfully capitalising on hydrocarbon frontiers where previously others had feared to tread. Senegal has many attributes of a frontier province and more. Thomson highlights the charms of the country due to its legacy as a former French colony, not to mention its deepwater port.
In addition to this, the country’s newly re-elected president, Macky Sall, is a geologist by training and has done much to make the most of the possibilities of the country becoming a major oil and gas producer, including the establishment of a petroleum institute for training national talent.
“Senegal had never had a deep well drilled before we made this discovery. It was truly a frontier,” Thomson says. “You learn from experience of the past—we may hold 100pc initially, but we will farm it down before we drill. But we still focus on those frontier areas where we believe we can make a difference. We are renowned as an experienced operator with governments—we play that to our advantage. We will continue to seek that frontier exposure because we believe it offers significant upside for shareholders, as long as it is at the right equity level.”
“When we look back at the end of this year, I’m hoping there are a number of opportunities where we will have been able to increase value,” he adds.
petroleum-economist.com · by Erikka Askeland